More DBE Fraud News

A story in Oregon’s Daily Journal of Commerce states that the FHWA announced that an investigation revealed that three highway contractors – Bud Construction LLC, Emery and Sons Inc., and Salt and Pepper Construction Co. – “contrived a relationship” to meet DBE program requirements for a $35 million Oregon DOT project completed in February.

According to the report, Bud, Emery, and Salt and Pepper, enter into a classic pass through scheme to whereby the stated MBE contractor performs no “commercial useful function” but rather that function is performed by a non-DBE contractor.

For now, the only sanctions appear to a removal of Salt and Pepper Construction Co.’s DBE status.  But, based on the allegations more severe sanction could follow.  Both Bud Construction, LLC and Emery and Sons, Inc. could be debarred from bidding on federal highway projects and could face heavy civil fines.  Worse yet could be criminal charges brought against the individuals involved with the scheme.

The most damning evidence could come from a statement given by the owner of Bud Construction where he stated:

“I’ve never been paid for that, and I’ve been doing this same thing 20 years for (Salt and Pepper),” he said. “I don’t know the wording; I’ve never seen (DBE) rules or regulations. All I do is coordinate that X amount of trucks are coming that day and I’m on the job site to make sure they are in place … I do it for a friend.”

As discussed before on this blog, the DOT and FHWA rules require DBE “rules and regulations” to appear in every federal highway contract.  Moreover, lack of knowledge of the rules is unlikely to be much of a defense in any criminal action against any of the individuals involved.

Despite all of this, one of the those involved was undeterred boldly boasting:

“Come after me; I don’t care.”

We can only speculate if he will maintain that same bravado when federal prosecutors come knocking on his door.

FAQ’s About DBE Fraud?

I received a number of questions regarding my last post about the growing number of federal prosecutions involving fraud in disadvantage business enterprise (“DBE”) programs.

Do the same rules apply to MBE and WBE contractors?

Yes.  MBE’s and WBE’s are both DBE’s.  MBE stands for minority business enterprise.   WBE stands for women (owned) business enterprise.  Therefore, firms working with MBE’s and WBE’s should report any suspected fraud on part of a MBE or WBE and should take caution when certifying monthly reports involving MBE and WBE firms.

What if I only work on state or local projects?

The last post involved the Department of Transportation’s DBE program.  That program applies only to projects involving federal transportation funding.  As a condition of receiving federal transportation money, state transportation agencies are required to implement DBE program that follows the Department of Transportation’s guidelines.  However, many state and local governments have their own DBE programs.   For example, the City of Philadelphia has its own DBE program for all City owned construction projects.

Even if the DBE program is purely a state or local DBE program, you could still find yourself the subject of the ire of federal prosecutors if you knowingly engage in a scheme to defraud the program.  As mentioned in my last post, violating the DBE program’s requirements is not against the law.  What is against the law are the predicate acts that you engage in while violating the program, such as mail fraud and wire fraud.  Therefore, if you are involved with a DBE fraud scheme on a purely state or local job and the mail, phone, or internet is used as part of that scheme, then you could be prosecuted under federal law.  Mail fraud and wire fraud are so broad that there is no wonder they are known as a prosecutor’s best friend.

Additionally, while many state and local projects are administered by a state or local agency, they often involve federal funds.  With federal funds comes the requirement that recipients follows federal law.  Therefore, you need to check your DBE program’s requirements carefully in order to assure that you know which program you are proceeding under.

What if I am asked to do work for a DBE by the general contractor?

Quite a few folks, who are non-DBE firms, advised me – somewhat disturbingly – that they have often been asked by a project’s general contractor during a project to perform work for a DBE firm rather than the party with whom they originally contracted.  While those that asked me were not entirely sure why they were asked to do so, the assumption is that the DBE could not handle the work for which it contracted.  In that scenario, if the non-DBE acquiesced to the general contractor’s request it could unwittingly find itself caught up in a classic DBE pass through fraud scheme.  In a DBE pass through scheme, the general contractor contracts with a DBE and certifies that a DBE is performing a certain percentage of the work.  However, in reality the work is actually being performed by a non-DBE entity.  If you firm was part of the scheme to conduct DBE fraud, it could be subject to charges of conspiracy.  Therefore, if you suspect you are being asked to contract with a DBE and your firm is going to perform all or a substantial portion of that DBE’s work, you should call an attorney before you proceed.

Of course, I invite additional questions on this topic and will reply to them in a future post.